Chinese Inflation Drops

Good day… And a tub-thumpin’ Thursday to you! It’s raining outside, and from the looks of the roads, it’s been raining all night, and that’s a good thing, as we’ve experienced a drought this summer here in the Midwest. Another “long day” on the desk yesterday… and that’s NOT a good thing! These people here can only deal with me here for so many hours a day! HA!

Front and center this morning, the data began to come in for China that we talked about yesterday. Overnight, we saw China’s inflation for July fall to 1.8% (from 2.2% in June). Recall yesterday I told you that if we saw 1.7%, it could very well indicate that China would opt for a rate cut. So at 1.8%, it’s not so clear. But I would have to think that the Chinese leaders took into consideration that industrial production, while still strong, cooled its heels a bit in July.

Then we also had retail sales for July print this morning, and they too backed off a bit, but still were able to grow 14.2%. Not too shabby, folks, especially when you consider that many well-known economists called for the Chinese economy to collapse over two years ago! So all these economic data did were put the rate cut on the back burner, in my opinion. I still believe that at least one if not more rate cut(s) are coming in China. And that won’t help the global growth picture, according to the markets.

Speaking of the markets as a whole. I was driving home yesterday and a great old song came on my satellite radio, by a band called the Marketts. Can you name that song? They only had one big one. I remember playing the song on my guitar many, many, many years ago!

So global growth doesn’t receive the shot of adrenalin it was looking for in the Chinese numbers. The Australian dollar (AUD) didn’t seem to mind, as July employment data showed a rise in jobs by 14,000 with the unemployment rate falling to 5.2%, from 5.3%.

The Canadian dollar/loonie (CAD) joined the A$ as the only commodity currency that saw rallies in the overnight markets. Norway got tarred with the same brush used on the eurozone. New Zealand’s second-quarter employment data were weak. And South Africa hasn’t been able to find a bid in a month of Sundays. So it looks as though it was simply a case of data flow or individual country news that allowed the A$ and loonie to advance versus the U.S. dollar overnight.

In Canada, Bank of Canada Governor Carney made the markets a warm and fuzzy when he said that the Canadian financial system is “firing on all cylinders.” Mr. Carney also gave me a warm and fuzzy when he didn’t take the opportunity to diss the loonie’s recent ascent versus the dollar to the south of Canada (not like they did in New Zealand!). Carney said that he wanted to see the loonie reflect Canada’s underlying fundamentals, and that Canada’s fundamentals are strong versus the rest of the world. Amen, brother! Sounds like Mr. Carney subscribed to the Pfennig!

And the Bank of Japan (BOJ) left rates unchanged and didn’t implement any new stimulus measures, just as I had thought! Nothing from nothing leaves nothing, right? So. how long can the Japanese yen (JPY) hold onto this lofty level of sub-80 (currently 78.50)? Good question! I told you a couple of months ago that I had given up, thrown in the towel on trying to figure out why investors thought the yen was a safe haven. Same thing with U.S. Treasuries. I had called for both bubbles to find a pin, but instead they have just continued to have more air pumped into them.

These two will experience their own Minsky moment at some time in the near future. And when they do… well, let’s stop here and talk about a Minsky moment. When I was a young man, I used to get to sit next to the great Hy Minsky and listen. I was like a sponge, taking in the knowledge he was giving to me. So here’s the definition of a Minsky moment for all of you not familiar with this once-great economist.

A Minsky moment is based on the idea that if a market falls or falls into crisis after an extended period of market speculation or unsustainable growth for long enough, it will eventually lead to a crisis; the longer speculation occurs, the worse the crisis will be. Sounds like yen and Treasuries, eh?

Adding his greatly respected thoughts on the subject of the Treasury bubble, the godfather of investment newsletters, Richard Russell, saw something that I was also prepared to talk about today: the yield on the 10-year Treasury gapped up 10 basis points, to 1.68%, in the last couple of days. Folks, bonds don’t move like that often. Here’s the great Richard Russell on this move:

“The yield on the bellwether 10-year note gapped up on the charts, and I’m thinking that the massive rally in bonds may be over. If so, this could mean the beginning of higher interest rates all around. In other words, has the great bond bubble popped?”

An asset that’s not in a bubble? Gold (and Silver, of course!) seems to have settled into its “dog days of summer trading pattern.” Take out last summer, when we had the double-whammy on the dollar of a debt ceiling debacle and a ratings cut — most summers settle in to a range, especially in August, when most of Europe is on holiday. But guess what’s right around the corner? Another debt ceiling discussion. If it turns into another debacle (and it very well could, given the fact that it’s an election year), these trading patterns will be dumped in a New York minute.

The data cupboard will yield the usual fare for Thursdays, which is the weekly initial jobless claims. And today we will also see the color of the June trade deficit. This whole two-months-behind data stuff gives me a rash, so you’ll have to go back into your memory and recall what the price of oil was doing in June. No, wait! I’ll do that for you!

It just so happens that the price of oil was in the low $80 range, with the black gold, Texas tea or just plain oil dipping to $78 on June 28. So given this, we can speculate that the trade deficit will have narrowed in June. But folks, this isn’t that important. What’s important is that it IS A DEFICIT, and has been a DEFICIT for a very long time. And you can bet your sweet bippie that the deficit will rise again.

Then There Was This: I saw a story on ZeroHedge.com yesterday that reminded me of the article I wrote for the old Sovereign Society newsletter, The Currency Capitalist. In the story, I went back in time and showed how going back to the Depression, people that should have known better made predictions or statements about the markets to calm fears, only to see those comments were so wrong they were stupid wrong! First, two quotes from Bernanke:

“At this juncture… the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained” — March 28, 2007.

“I don’t think student loans are a financial stability issue, to the same extent that, say, mortgage debt was in the last crisis, because most of it is held not by financial institutions, but by the federal government.” — Aug. 7, 2012.

ZeroHedge adds this: “Please mark your calendars accordingly, as yesterday the chairman just guaranteed that student loans will be cause for the next ‘financial stability issue’”

That would be funny if it weren’t so true!

To recap: The currency rally lost steam yesterday, and the only commodity currencies that have gained overnight are Aussie and Canadian dollars. But then, they both had some good news either in the form of data or central bank statements to fuel their gains. Chinese data began to print overnight, and they were mixed. Inflation fell from 2.2% to 1.8%, which on its own would point to a rate cut by the Chinese. But industrial production and retail sales were both marginally weaker, showing resiliency Richard Russell adds his 2 cents to Chuck’s Treasury bubble thoughts.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning